Corporate Governance and Balance scorecard

CORPORATE GOVERNANCE

Definition:

Corporate Governance is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, customers and suppliers, and complying with legal and regulatory requirements, apart from environmental and local community needs. Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally for accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society. The system by which companies are directed and controlled; boards of directors are responsible for governance of companies.

An Indian and International Position Review:

Best practices in the field of corporate governance may broadly be grouped under four categories: those relating to corporate boards and directors, those concerning operational management and control, those dealing with credibility and transparency of reporting, and those bearing upon shareholder democracy and minority protection. The current position as recommended by industry bodies, mandated by regulators, and legislated by existing law is reviewed in this part, suitably drawing upon international experience where appropriate, pointing to potential areas for further improvement.

Corporate Boards and Directors

Reference has already been made to the critical positioning of the board of directors in the corporate from the organization. In the United Kingdom, the Cadbury Report placed the corporate board at the centre stage if the governance system which it described as one by which
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companies are directed and governed. Given the fiduciary relationships that corporate directors are subject to, there is an overwhelming need to ensure that they discharge their responsibilities to the best of their abilities to protect and promote the interest of all shareholders. At the same time, there is also pressing need to delineate the directing and managing aspects of governance. It is in this perspective that the role, responsibility and accountability, constitution, structure, independence, competence, remuneration, empowerment, and evaluation of corporate boards and their directors need to be considered.

Operational Management and Control

While a competent and independent board of directors is a prerequisite to ensure that created wealth is applied for the benefit of all shareholders, the board and executive management of the company have to address in the first place, the all-important task of creating and protecting such wealth and wealth-creating assets and resources. Policymaking structure and managerial and operational process that help achieve these objectives are indeed the constituents of corporate governance.

Reporting and Disclosure

1. Company law in India requires a companys board to provide an annual report to its shareholders. The minimum contents of report and matters requiring disclosure have been prescribed, as have been the formats in which the companys financials are to be prepared, audited, and submitted to the shareholders. The auditors report is a significantly detailed document and is required to be actually read out at the annual general meetings of shareholders. Considering the less than satisfactory attendance and even worse levels of participation by shareholders at such meetings, there is a case for removing this requirement altogether. 2. Shareholders are required to decide on a number of matters and it is important that the company provides its shareholders adequate information to enable them to exercise their votes. Company law again provides for explanatory statements to be provided to shareholders on certain key matters that require approval by a special resolution.

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Shareholder Democracy and Protection of Minority Interests

1. Corporations are owned in a legal sense by shareholders who subscribe to their equity capital on the basis of a public offer or a private placement, in either case relying upon the stated objectives of the company in the offer document. They exercise their rights in general meetings of shareholders of the company. Usually their voting rights are proportional to their shareholding. Current company law requirements mandate a 75% majority in certain matters and a simple majority in other cases, of those present and voting at the meeting. A show of hands is usually enough for the chair to determine if a resolution has the required majority. There is, of course, a provision for poll in case of doubts or when demanded by eligible shareholders. 2. Because of their initial and ongoing reliance on information provided by the company and those responsible for its governance, shareholders seek and are entitled to some protection from being deceived or unfairly treated by those in operational control. Reporting and disclosure requirements and best practices are developed to meet this need. More importance is also attached to protecting the interests of minority shareholders on the basis that by themselves, individually, they may not have the resources to do so. But what is important to note in this context is that no protection is justified or to be expected by any shareholder including the minority shareholder in respect of the equity risk that he or she takes when investing in risky instruments like company shares. SEBI requirements for highlighting the risk factors in equity offers is an example of how potential investors should be made aware of the nature and extent of risks involved in investing. Protection of shareholder interests should, therefore, be applicable to matters relating to transparency in accounting and reporting, majority oppression, biased management, non-conforming to obligatory requirements, and so on, but certainly not to issues arising from normal business risk that equity investments are subject to.

The Board Key to Good Corporate Governance

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An effective board of directors is the linchpin of good corporate governance. The board of directors constitute the representatives of the shareholders and are expected to provide corporate leadership and strategic and competent guidance independent of the management of the company. In India, the board of directors generally comprise promoters, directors, professional directors, and institutionally nominated directors.

Board Constitution
1. The board should be composed of qualified individuals of integrity diversity of experience. At a minimum, qualified means a good working knowledge of corporate finance. 2. Each board member should be able to devote sufficient time to his duties and responsibilities. 3. Boards should be composed of a substantial number of independent directors. Boards should disclose their criteria for independence to their shareholders and stakeholders. 4. Board committees on compensation, audit and nomination should consist only of independent directors. The executive session of the board should also comprise only independent directors. 5. For family-owned business, outside directors are essential to Ask the hard questions of family owners, where the relationship between the business and family may be blurred.

Board Responsibility
1. Approve a core philosophy and mission 2. Monitor and evaluate corporate performance 3. Monitor and evaluate corporate strategy 4. Review and approve material transactions not in the course of ordinary business

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5. Determine executive compensation 6. Evaluate senior management performance 7. Manage executive director/CEO succession 8. Communicate with shareholders 9. Evaluate board performance.

Parties to corporate governance

Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management, shareholders and Auditors). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large. The shareholder delegates decision rights to the manager to act in the principal's best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. With the significant increase in equity holdings of investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organization's strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities. The Company Secretary, known as a Corporate Secretary in the US and often referred to as a Chartered Secretary if qualified by the Institute of Chartered Secretaries and Administrators

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(ICSA), is a high ranking professional who is trained to uphold the highest standards of corporate governance, effective operations, compliance and administration. All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organization. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital. A key factor is an individual's decision to participate in an organization e.g. through providing financial capital and trust that they will receive a fair share of the organizational returns. If some parties are receiving more than their fair return then participants may choose to not continue participating leading to organizational collapse.

Principles

Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization. Commonly accepted principles of corporate governance include:

Rights and equitable treatment of shareholders: Organizations should

respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.

Interests of other stakeholders: Organizations should recognize that they have

legal and other obligations to all legitimate stakeholders.

Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and

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have an appropriate level of commitment to fulfil its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.

Integrity and ethical behaviour: Ethical and responsible decision making is not
only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.

Disclosure and transparency: Organizations should clarify and make publicly

known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Issues involving corporate governance principles include:

internal controls and internal auditors the independence of the entity's external auditors and the quality of their audits oversight and management of risk oversight of the preparation of the entity's financial statements review of the compensation arrangements for the chief executive officer and other senior executives the resources made available to directors in carrying out their duties the way in which individuals are nominated for positions on the board dividend policy

Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers' behaviour,

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an independent third party (the external auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with its legal
authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.

Internal control procedures and internal auditors: Internal control

procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting

Balance of power: The simplest balance of power is very common; require that the
President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.

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Remuneration: Performance-based remuneration is designed to relate some

proportion of salary to individual performance. It may be in the form of cash or noncash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organisation. Examples include:

competition debt covenants demand for and assessment of performance information government regulations managerial labour market media pressure takeovers

Code of Conduct for Corporate Governance

SEBI prescribes that there should be a conduct for board of director. It shall be obligatory for the board of a company to lay down the code of conduct for all board members and senior management of a company. This code of conduct shall be posted on the website of a company. All board members and senior management personnel shall affirm compliance with the code of conduct. The annual report of a company shall contain a declaration to this effect signed by the CEO and COO. While drafting the code of conduct for corporate governance for the entire corporate sector, the following aspects can be kept in view: Prescribing of ethical values which are universally acceptable Providing for highest standards of functioning as board of directors in an impartial and objective manner

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Ensuring transparency in functioning How requisite care and diligence has to be ensured in functioning Encouraging discipline Avoiding conflict of interests Ensuring confidentiality Providing of requisite incentives for efficient and effective functioning Respecting one another Loyalty to the organization Providing motivation

In this context, a reference can be made to the Organization for Economic Co-operation and Development (OECD) which has prepared guidelines for multinational enterprises. These provide principles and standards for good practice consistence with applicable laws. The general policies of the OECD lay down that enterprises should contribute to economic, social and environmental progress with the view to achieving sustainable development, respect for human rights of those affected by their activities consistent with the host governments international obligations and commitments.

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Case Studies of Corporate Governance Practices

Cemento Argos
When Cemento Argos was founded in Medellin, Colombia, 70 years ago, its founders could scarcely have imagined that their small entrepreneurial venture would one day become the biggest cement company in Colombia, the fifth-largest producer in Latin America and one of the pioneers of good governance in the region.

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In the beginning, the founders realized that they would need co-investors to move ahead with plans to build their first cement factory. The City of Medellin and the Antioquia Railroad were the business first partners. Two years later, the factory was operating and the company began a history of fruitful creation of new plants and subsidiary companies. Earlier this year, Argos, with combined annual revenues of US$ 760 million,announced the merger of its eight Colombian cement subsidiaries. The merged entity will supply 51% of the local market, and expects to export US$ 110 million worth of products annually to 18 countries. Argos decided to adopt a Corporate Governance Code based on international standards, such as those enforced by the New York Stock Exchange (NYSE) and recommended by the Brazilian Institute for Corporate Governance (IBGC). Argos management believes that implementing better disclosure practices helps generate wealth for shareholders and facilitates access to investors. The management is also convinced that adopting good governance practices differentiates Argos from its competitors in the product and capital markets.

Corporate Governance Adding Value

When Argos decided to adopt good governance practices, it faced an almost complete lack of knowledge on the subject in the Colombian market. It was essential for Argos to convey to the market what corporate governance was, and that the principles of good governance were not just a fadthey were here to stay. The company initially adopted a basic Code, which was subsequently amended in light of international benchmarks. The revised Code, emphasizing aspects of disclosure and free flow of information, was discussed with a variety of stakeholders, from employees to the Board of Directors. Argos challenged itself to comply with the highest corporate governance standards advocated by international organizations, following recommendations by its shareholders, the Board of Directors and other stakeholders. In 2004, Argos finalized and published its Good Governance Code, which complies with the great majority of the NYSE, OECD, World Bank and local institutions recommendations. Argos lives up to its motto, Adding Value Every Day in its relationships with all stakeholders. Its structure of governance focuses on five main pillars: fair treatment of shareholders; strengthening the structure and performance of the Board of Directors; developing procedures to provide accurate, complete and timely information; establishing an ethics code for employees; and regulating relations with different interest groups. Finally and notably, it was decided that both internal and external auditors should review and inform the market of Argos compliance with its Good Governance Code. International investors and pension funds are important Argos shareholders. The major shareholder bloc is composed of the largest industrial group in Colombia. Around 46% is held by public investors.

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The Board of Directors

The Board of Argos is composed of five Directors and is supported by three Board committees: Audit & Finance; Nominations and Remuneration; and Board Issues. The Audit & Finance Committee focuses on supervising internal control processes, assuring transparency and accurate disclosure of financial information, overseeing internal auditing activities, and supporting Board decision-making on controls. The Nominations and Remuneration Committee establishes policies on hiring, compensation, and the development of key personnel. It proposes a compensation plan that is linked to both personal and company performance. The Committee is in charge of revising the companys senior management succession plan. The Boards compensation is approved by the Annual General Meeting of Shareholders, which may also dismiss and reelect Directors even before the end of their tenures. The Board Issues Committee concerns itself with the role and responsibilities of Directors, recruits new members and defines the policies for ensuring the proper composition of the Board. An evaluation system for Directors has been implemented by the Committee, and there is a continuous program of training and development for Directors.The CEO and Chairman of the Board are separated at Argos.

Results
Argos, a member of the largest industrial group in ColombiaGrupo Empresarial Antioqueo has a market capitalization of US$ 2,100 million. With its investment portfolio focused on cement, ready-mix and related businesses, Argos is the leader in Colombias cement industry and holds the fifth-largest position among cement producers in Latin America. It is difficult to precisely measure the direct benefits of adopting good governance practices, but Argos can point to substantive results. Its shares have steadily increased in value: Argos

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stock climbed 68% during 2004, and was up 40% through August 2005. The company does not rule out the possibility of issuing shares on the NYSE in the future. Argos is still perfecting its governance system. Its main challenges are strengthening its Board of Directors and the Board committees. Better systems for overseeing compliance with its Code of Ethics and enhancement of its disclosure practices are ssssamong Argos future plans.

Case:- 2 Case Study on Corporate Governance: UTI Scam

Of all the recent encounters of the Indian public with the much-celebrated forces of the market, the Unit Trusts US-64 debacle is the worst. Its gravity far exceeds the stock market downswing of the mid-1990s, which wiped out Rs. 20,000 crores in savings. The debacle is part of the economic slowdown which has eliminated one million jobs and also burst the information technology (IT) bubble. This has tragically led to suicides by investors. And then suspension of trading in US-64made the hapless investors more dejected at the sinking of this super-safe public sector instrument that had delivered a regular return since 1964. There is a larger lesson in the US-64 debacle for policies towards public savings and public sector undertakings (PSUs). The US-64 crisis is rooted in plain mismanagement. US-64 was launched as a steady income fund. Logically, it should have invested in debt, especially lowrisk fixed-income government bonds. Instead, its managers increasingly invested in equities,

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with high-risk speculative returns. In the late 1980s UTI was politicised with other financial institutions (FIs) such as LIC and GIC, and made to invest in certain favoured scrips. By the mid-1990s, equities exceeded debt in its portfolio. The FIs were also used to boost the market artificially as an endorsement of controversial economic policies. In the past couple of years, UTI made downright imprudent but heavy investments in stocks from Ketan Parekhs favourite K-10 portfolio, such as Himachal Futuristic, Global Tele and DSQ. These technology investments took place despite indications that the technology boom had ended. US-64 lost half its Rs. 30,000 crore portfolio value within a year. UTI sank Rs. 3,400 crores in just six out of a portfolio of 44 scrips. This eroded by 60 percent. Early that year, US-64s net asset value plunged below par (Rs.10). But it was re-purchasing US-64 above Rs. 14! Today, its NAV stands at Rs. 8.30 a massive loss for 13 million unit-holders.It is inconceivable that UTI made these fateful investment decisions on its own. According to insiders, the Finance Ministry substantially influenced them: all major decisions need high-level political approval. Indeed, collusion between the FIs, and shady operators like Harshad Mehta, was central to the Securities Scam of 1992. The Joint Parliamentary Committees report documents this. In recent months, the Finance Ministry became desperate to reverse the post-Budget market downturn. UTIs misinvestment now coincided with the global technology meltdown. US-64 crashed. UTI chairman resigned. Although culpable, he was probably a scapegoat too. The Ministry has kept a close watch on UTI, especially since 1999.The US-64 debacle, then, is not just a UTI scam. It is a governance scam involving mismanagement by a government frustrated at the failure of its macroeconomic calculations. This should have ensured the Finance Ministers exit in any democracy which respects parliamentary norms. There are larger lessons in the UTI debacle. If a well-established, and until recently well-managed, institution like UTI cannot safeguard public savings, then we should not allow the most precious of such savings pensions to be put at risk. Such risky investment is banned in many selfavowedly capitalist European economies. In India, the argument acquires greater force given the poorly regulated, extremely volatile, stock market where a dozen brokers control 90 percent of trade. Yet, there is a proposal by the Finance Ministry to privatize pensions and provident funds. Basically, the government, deplorably, wants to get rid of its annual pension obligation of Rs. 22,000 crores.

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Case:- 3 Corporate Governance at Infosys:

The case, 'Corporate Governance at Infosys'talks about the corporate governance practices at Infosys, one of India's largest software companies. Till late 1990s, corporate governance did not have much significance in India. In 1999, two committees (Confederation of Indian Industries, CII and the Kumar Mangalam Birla Committee) were set up to recommend good governance norms. These committees came out with several recommendations, which were made mandatory for the companies to adhere to by 2001. Infosys was one of the first companies in India which had complied with the recommendations made by the committees. The case discusses in detail, the corporate governance practices at Infosys, which complied with most of the recommendations made by the committees.

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From the case, we are expected to understand the corporate governance practices at Infosys. From the case ,we can understand how Infosys became the best managed company in India because of its good governance practices. The case would also enable the we understand the importance of corporate governance in business. The objective of the case is to understand that good governance would make a company more professional. The fundamental objective of corporate governance is the enhancement of long-term shareholder value while, at the same time, protecting the interests of other stakeholders. - Kumar Mangalam Committee report on corporate governance, 1999. We've always striven hard for respectability, transparency and to create an ethical organisation. There are certain expectations that we haven't fulfilled. But we're also a very young organisation and in areas like track record of management, we may be low because we're yet to show longevity. - Narayana NR Murthy, Chairman and CEO, Infosys Technologies Limited (Infosys), 2001.

The High Priest of Corporate Governance

By the late 1990s, Infosys Technologies Limited (Infosys)1 had clearly emerged one of the best managed companies in India. Its corporate governance practices seemed to be better than those of many other companies in India. Because of its good governance practices, Infosys was the recipient of many awards. In 2001, Infosys was rated India's most respected company by Business World2. Infosys was also ranked second in corporate governance among 495 emerging companies in a survey conducted by Credit Lyonnais Securities Asia (CLSA) Emerging Markets. It was voted India's best managed company five years in a row (1996-2000) by the Asiamoney poll. In 2000, Infosys had been awarded the "National Award for Excellence in Corporate Governance" by the Government of India. In 1999, Infosys had been selected as one of Asia's leading companies in the Far Eastern Economic Review's REVIEW 2000 Survey and voted India's most admired company by The Economic Times. Infosys had also provided all the information required by the Cadbury committee3 Infosys had benchmarked its corporate governance practices against those of the best managed companies in the world (Refer Exhibit I for broad structures and processes for good governance). It was one of the first companies in India to publish a compliance report on corporate governance, based on the recommendations of a committee constituted by the Confederation of Indian Industries (CII).4 Infosys maintained a high degree of transparency while disclosing information to stakeholders. It had been providing consolidated financial statements under US GAAP to its global investors and financial statements under Indian GAAP to Indian shareholders. Infosys provided details on high and low monthly averages of share prices in all the stock exchanges on which the company's shares were listed. It was one of the few companies in India to provide segmentwise breakup of revenues.

Code of Corporate Governance

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In the late 1990s, the Confederation of Indian Industries (CII) published a code of corporate governance (Refer Exhibit II for the highlights of the report). In 1999, the Securities and Exchange Board of India (SEBI) appointed a committee under the Chairmanship of Kumar Mangalam Birla5 to recommend a code of corporate governance. The report was submitted by the committee in November 1999 and accepted by SEBI in December 1999 (Refer Exhibit III for the highlights of the report). Infosys had accepted the recommendation of both the CII and the Kumar Mangalam Birla Committee. This section provides an overview of corporate governance practices followed by Infosys. Infosys had an executive chairman and chief executive officer (CEO) and a managing director, president and chief operating officer (COO). The CEO was responsible for corporate strategy, brand equity, planning, external contacts, acquisitions, and board matters. The COO was responsible for all day-to-day operational issues and achievement of the annual targets in client satisfaction, sales, profits, quality, productivity, employee empowerment and employee retention. The CEO, COO, executive directors and the senior management made periodic presentations to the board on their targets, responsibilities and performance. In 2001, the board had sixteen directors. There were eight executive directors and eight nonexecutive directors (Refer Table I). Infosys believed that the one thing that could help them to improve corporate governance was to bring international professionals on corporate boards. The board members were expected to possess the expertise, skills and experience required to manage and guide a high growth, hi-tech software company. Expertise in strategy, technology, finance, and human resources was essential. Generally, they were between 40 and 55 years of age and were not related to the other board members. They did not serve in any executive or non-executive position in any company in direct competition with Infosys. The board members were expected to rigorously prepare for, attend, and participate in all board and relevant committee meetings. Each board member was expected to ensure that other existing and planned future commitments did not interfere with the member's responsibility as a director of Infosys. Normally, the board meetings were scheduled at least a month in advance. Most of the meetings were held at the company's registered office at Electronics City, Bangalore, India. The chairman of the board and the company secretary drafted the agenda for each board meeting and distributed it in advance to the board members. Board members were free to suggest the inclusion of any item on the agenda. Normally, the board met once a quarter to review the quarterly results and other issues. The board also met on the occasion of the annual shareholders' meeting. If the need arose, additional meetings were held. The non-executive directors had to attend at least four board meetings in a year. The board had access to any information that it wanted about the company. In 2001, the board had three committees - the nominations committee, the compensation committee and the audit committee. To ensure independence of the board, the members of the nominations committee, the compensation committee and the audit committee were all nonexecutive directors. The nominations committee had four non-executive directors who looked after the issue of retirement of existing members and their re-appointment, on the basis of their performance.

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The nominations committee constantly evaluated the contribution of the members of the board and recommended to shareholders their re-appointment. The executive directors were appointed by the shareholders for a maximum period of five years, but were eligible for reappointment upon completion of their term. The nominations committee adopted a retirement policy for the members of the board under which the maximum age of retirement of executive directors, including the CEO, was 60 years, which was the age of superannuation for the employees of the company. Their continuation as members of the board upon superannuation / retirement was determined by the nominations committee. The compensation committee, which had three non-executive directors, looked after issues relating to compensation and benefits for board members. It determined and recommended to the board, the compensation payable to the members of the board. The compensation of the executive directors consisted of a fixed component that was paid monthly, and a variable component, which was paid quarterly, based on performance. The annual compensation of the executive directors was approved by the compensation committee within the parameters set by the shareholders at the shareholders meetings. The shareholders determined the compensation of the executive directors for the entire period of their term. The compensation of the non-executive directors was approved at a meeting of the full board. The components were a fixed amount, and a variable amount based on their attendance of the board and committee meetings. The total compensation payable to all the non-executive directors together was limited to a fixed sum per year determined by the board. This sum was within the limit of 0.5% of the net profits of the company for the year calculated, as per the provisions of the Companies Act and as approved by the shareholders. The compensation payable to the non-executive directors (and the method of calculation) was disclosed in the financial statements. Since 1999, the non-executive directors were eligible for stock options. Of the compensation payable for the year 1999, 60% was paid for being on the board and the balance 40% was paid in proportion to the board/committee meetings attended. None of the directors gained financially from any other contract of significance which the company or any of its subsidiary undertakings was party to. The audit committee was responsible for effective supervision of the financial reporting process, ensuring financial and accounting controls and compliance with the financial policies of the company. The committee periodically interacted with the statutory auditors and the internal auditors to ascertain the quality of the company's transactions; to review the manner in which they were performing their responsibilities; and to discuss auditing, internal control and financial reporting issues. The committee provided overall direction on the risk management policies and also indicated the areas that internal and management audits should focus on. The committee had full access to financial data. The committee reviewed the annual and half yearly financial statements before they were submitted to the board. The committee also monitored proposed changes in the accounting policy, reviewed the internal audit functions and discussed the accounting implications of major transactions. As per the recommendations of the Kumar Mangalam Committee, Infosys included a separate section on corporate governance in its annual report, which disclosed the remuneration paid to directors in all forms, including salary, benefits, bonuses, stock options. The annual report also carried a compliance certificate from the auditors.

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Infosys also laid emphasis on succession planning and management development. The chairman reviewed succession planning and management development with the board from time to time. The chairman and CEO also managed all interaction with the investors, media, and the government. Where necessary, he took advice and help from the managing director, president, and COO as well as the CFO. The managing director and COO managed all interactions with the clients, taking the advice and the help of the CEO. Both the CEO and the COO handled employee communication.

Infosys-A Benchmark for Corporate Governance

Some analysts felt that Infosys' corporate governance practices offered many lessons to corporate India. Infosys had shown that increasing shareholder wealth and safeguarding the interests of other stakeholders was not incompatible. Infosys had given its non-executive directors the mandate to pass judgement on the efficacy of its business plans. Every nonexecutive director not only played an active role in decision making, but also led or served on at least one of the three (Nomination, Compensation and Audit) committees. Infosys' founders had set very high standards, in a country where malpractices by founders were rampant. The founders only took salaries and dividends and derived no other financial benefits from the company. Commenting on the strengths and weaknesses of Infosys' corporate governance, Nandan M Nilekani, Managing Director, Chief Operating Officer and President of Infosys, said, "The strengths are that we have been very successful in creating a value based system with a very strong focus on ethics, and strong division between personal and professional funds etc. That has translated into brand equity, shareholder value etc. Obviously, we can do things better. We believe that we can never stand still. We will keep looking at global best practices, what the world is saying on this front. We keep trying to improve the way we manage to be on par with it." It remained to be seen whether other Indian companies could emulate Infosys form of corporate governance.

Bibliography

BOOKS:-

Business Environment by- Shaikh Saleem (Published by-Pearson)

WEBSITE:-

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1. http://www.apexinstitute.ac.in/corporate-governance-1html 2.http://alsante.wrytestuff.com/swa11985.htm 3.http://www.mbaknol.com/business-ethics/case-study-on-corporategovernance-uti-scam/ 4.http://www.icmrindia.org/casestudies/catalogue/Corporate %20Governance/Corporate%20Governance%20at%20Infosys.htm

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